Co-Operative Cedes Majority Control of Bank Unit to Bondholders

Oct. 21 (Bloomberg) -- The Co-Operative Group Ltd. agreed
to cede control of its banking unit to creditors after 141
years, part of a deal to allow the lender to plug a 1.5 billion-pound ($2.4 billion) capital shortfall.

Co-Operative Group, a mutual whose businesses range from
supermarkets to funeral parlors, will keep a 30 percent stake in
Co-Operative Bank Ltd. after reaching an agreement in principal
with creditors, Chief Executive Officer Euan Sutherland, 44,
said in a statement today. The Manchester, England-based company
will remain the bank’s largest shareholder, he said.

The group, which traces its roots to Britain’s 19th century
industrial north, had sought to keep control over its banking
unit while forcing bondholders to exchange subordinated debt for
new equity and senior debt. Bondholders may now seek to find a
buyer for the lender, which has 4.7 million customers.

“It’s difficult to imagine a group of bondholders coming
together to take over a bank unless they have some comfort,
possibly from another party,” said Eva Olsson, a credit analyst
at Mitsubishi UFJ Securities in London. “They normally just
want their money back,” she said. “To start a bank of that
size is very costly and difficult in the U.K. because there are
very high barriers to entry.”

An ownership change may also trigger reductions in the size
of Co-Operative Bank’s 7,800-strong workforce, according to
Andre Spicer, professor of organizational behavior at Cass
Business School in London.

Job Cuts?

“The number of staff the Co-Op employs is likely to drop
as management search for efficiencies,” he said. “Staff who
remain are likely to find themselves loaded down with various
restructuring efforts.”

Regulators pushed Co-Operative Group to close the capital
deficit following the failure of the bank’s bid for more than
600 Lloyds Banking Group Plc branches last year, a deal that
would have more than doubled its number of outlets.

Co-Operative Group couldn’t plug the gap by turning to
shareholders in a rights offering, like competitors including
Barclays Plc. Instead, the group pledged 1 billion pounds to the
banking unit through selling assets and increasing borrowings,
then asked bondholders to provide a further 500 million pounds
in a debt swap.

LT2, a group of bondholders who own 43 percent of the
lender’s lower tier-2 securities, rejected that proposal and,
advised by Moelis & Co., pushed to convert the bank’s
subordinated bonds and preferred shares into common stock.

Co-Operative Bank’s 500 million euros ($684 million) of
2.375 percent senior bonds due in October 2015 gained 1.13 cents
in the euro to 95.86 cents, the highest since May, according to
data compiled by Bloomberg.

Britannia Purchase

Bank of England Deputy Governor Andrew Bailey told
lawmakers in July the “main issue” that brought down Co-Operative Bank was the assets it acquired from Britannia
Building Society in 2009. Those souring loans prompted Co-Operative Bank to report a fourfold increase in impairments in
2012 and a pretax loss of 673.7 million pounds.

Peter Marks, Co-Operative Group’s former CEO, is slated to
give evidence to lawmakers tomorrow about the aborted Lloyds
branches purchase.

Separately, the bank said today it will set aside an
additional 100 million pounds to 105 million pounds to cover
costs such as compensating clients who were wrongly sold
payment-protection insurance.